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You can make a claim, known as a recision, by seeking the entire purchase price, including commissions.

This isn't a small problem, and it can happen to you. The SEC recently charged 82 people and companies nationwide in 26 suspected microcap fraud cases involving at least $12 million.

One of those cases involved a fraudulent offering in 1997 by a Los Angeles-based microcap stock, PSA Inc. The 15 people charged by the SEC allegedly caused the price of PSA to rise artificially from 50 cents a share to $5 a share in just two weeks. Then it plummeted to a few pennies a share while the accused reaped $1 million in profits from unsuspecting investors.

To be sure, not all microcap stocks are bad, nor are the dealers that buy and sell them. Most are legitimate companies hard at work trying to succeed. Those are not the firms we?re talking about here.

How can you spot fraud? And how can you get your money back if it happens to you?

First,you should understand that microcaps, sometimes called penny-stocks, are inherently riskier that bigger stocks because they represent small companies struggling to get an economic foothold. They may be undercapitalized and have a very limited number of shares trading. They don't qualify for listing on the NASDAQ, so they trade thinly through listings called "pink sheets."

It is possible for one unscrupulous brokerage, or several in cahoots, to control trading in the shares and thus manipulate the price.

Cracking down

Starting in 1990, the SEC tried to make it tougher for rip-off artists to take advantage of investors in penny stocks by requiring any broker that tries to sell you a penny stock to get a signed "Agreement to Purchase" form before the sale.

Designated securities are those that are less than $5 a share and represent companies with less than $2 million in net tangible assets, according to former broker James Punderson and securities attorney Charles O?Rourke. They wrote, "How to Sue Your Stockbroker Without a Lawyer."

A dealer must also give you a Customer Suitability Statement signed by his firm and containing an explanation of why this risky designated security is suitable for you.

The rules got even tougher in 1992 when the SEC required brokers who sell penny stocks to give you a Risk Disclosure Document that states, if the stocks are sold to you in violation of your rights "you may be able to cancel your purchase and get your money back," Punderson writes.

Penny-stock brokers also disclose to buyers what their cost was in the stocks they may be reselling to you, and thus how much profit they?ll take on the shares. For example, if the broker isn't just acting as a middleman between buyer and seller, but is actually a principal who will profit -- not by commission, but by sale of shares -- you should know that.

If you get a trade confirmation in the mail and no commission is reported, the broker is receiving a mark-up on the sale. This happens in a wide variety of stock transactions, not just penny-stock trading. There is nothing inherently wrong with it but you need to understand it and the brokerage's potential for reaping large profits.

It is particularly dangerous in penny-stock trading if a few unscrupulous brokers can manipulate the trading to push up the price then resell to you at top dollar.

What can you do?

The SEC has instituted the stringent rules on penny-stocks to allow you to get your money back if you?ve been cheated. If the broker failed to follow the required steps of providing a suitability finding, made excessive mark-ups, misrepresented to stock or committed fraud, you can make claim that may be arbitrated, Punderson states.

You must keep copies of the confirmation slips for the transactions or the monthly statements that show the trades. Check whether you received a Customer Suitability Statement and if there was a specific determination the trade was suitable to you.

Was the form signed and returned to the broker before the trade? And did you sign an Agreement to Purchase form with the brokerage before the trade? Also, you should have received a Risk Disclosure Document before the trade.

If these steps weren't followed, you may be able to show the rules were violated on your penny-stock trade, according to Punderson.

You can make a claim, known as a recision, by seeking the entire purchase price, including commissions. You must return the securities to the broker in exchange for getting the money back and if you sold some shares, you must deduct the amount received in the sale from your award, Punderson says.

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